The European Court of Auditors warned this Monday in a new report of possible financial risks for the Single Resolution Mechanism (SRM), in charge of managing the orderly liquidation of unviable banks in the banking union, as a result of future judgments and litigation.

The SRM is made up of the Single Resolution Board (SRB), a body of the European Union (EU) based in Brussels in charge of deciding how to proceed at the European level when a bank is bankrupt or in the process of failing, and by the Single Resolution Fund (FUR), which can be used to support bank resolutions, but which has not been used for the moment. The FUR is financed with contributions from the banking sector.

The European Court of Auditors is obliged to report every year on any financial risk that arises, in particular from legal proceedings, in relation to the SRM.

In the report published today, it concludes that for the 2019 financial year, the Single Resolution Board revealed contingent liabilities related to ongoing legal proceedings.

However, the auditors indicate “the possible financial consequences of some judgments that are later pronounced and others that arise from new litigation.”

In a statement, they indicate that “due to its relatively new nature”, the legal framework governing the resolution has created a “complex, specific and unprecedented” legal environment.

In fact, they highlight that there are currently “several pending litigation” before national and EU courts related to the SRM regulation.

Provisions and contingent liabilities reflect the financial risk to which an entity is exposed and, for 2019, the SRB disclosed contingent liabilities amounting to 2,047 million euros for national court proceedings and in EU courts, while the Commission and the Council did not disclose any.

The Court of Auditors specifies that the contingent liabilities indicated by the SRB are linked to disputes against prior contributions (“ex ante”) that banks pay to finance the Single Resolution Fund.

“However, a possible outflow of resources was not identified in terms of the actual resolution decisions, since the SRB and the Commission considered this possibility remote. The auditors did not find evidence that contradicted that assessment,” the court affirms.

Given the recent rulings handed down by the EU courts, the auditors note that the Single Resolution Board will have to “reevaluate all new and pending legal processes related to ‘ex ante’ contributions to the FUR”.

In particular, the auditors recall that the General Court of the European Union declared the partial illegality of the legal framework of the method used to calculate the contributions “ex ante” in a judgment that is not yet final.

On the other hand, recent jurisprudence also clarifies that only the EU courts can rule on the validity of decisions taken by the SRB regarding contributions “ex ante”.

“In this way, it is highly unlikely that a risk will be generated as a result of national judicial procedures on contributions ‘ex ante’ to the SRF,” argues the report.

“In 2019, the SRB’s financial risk statement was adequate,” stated the member of the court responsible for the report, Rimantas Sadzius.

He stressed that, however, “several recent sentences and the new judicial processes may pose more financial risks.”

“Anticipating such risks constitutes a principle of good management of public funds. Therefore, we recommend that the SRB carry out a thorough reassessment of its risks in the 2020 accounts,” he said.

On June 15, there were 107 ongoing legal proceedings before the EU courts on bank resolution decisions, most of them referring to the Banco Popular resolution, ordered by the JUR in 2017.

There were also 7 cases related to the principle of avoiding damages to creditors greater than those of ordinary insolvency proceedings and 23 cases against contributions “ex ante” to the Single Resolution Fund.

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